The Wall Street Journal – Rate Probe Keys On Traders
Investigators in a world-wide probe of how crucial interest rates are set are focusing on a small number of traders suspected of trying to influence other bank employees to manipulate the rates, according to people familiar with the situation. The move is part of investigations by regulators and law-enforcement officials in Europe, Japan and the U.S. that began more than a year ago. Officials are trying to determine if major banks colluded to manipulate benchmark interest rates such as the London interbank offered rate, commonly known as Libor, and the Tokyo interbank offered rate, or Tibor. There is no indication that the alleged actions by the traders resulted in bank employees acting improperly in setting rates or that there has been any collusion among banks, say people familiar with the situation…People familiar with the ongoing probe said investigators in Japan have found dozens of emails and online chat messages from traders who appeared to be trying to influence other bank employees who submitted Libor or Tibor quotes involved in the interest-rate-setting process. None of the traders has been charged with wrongdoing. Japanese authorities have taken civil actions against two banks. Several banks have disclosed they are under investigation in Europe and the U.S., but this doesn’t indicate that any charges will result. In the wider investigation, officials are trying to determine whether some banks deliberately tried to skew Libor by submitting inaccurate data during the financial crisis. One possibility being looked at is whether any banks held down their rates, so as to try not to appear in riskier financial condition than their rivals.
For years we have argued that the LIBOR market essentially does not exist. Federal Reserve intervention and banks lying about their levels have strained the credibility of this measure. As the chart above shows, the difference between the highest and lowest reported 3-month LIBOR bank rates is at its widest spread since May 2009.
We have linked stories proclaiming “LIBOR fails to paint a true picture” and that extraordinary government intervention in this market has distorted the rate so much that banks are reducing their use of LIBOR as a reference rate for new unsecured lending. It still remains the reference rate for trillions of existing loans, securities, derivatives and bank deposits. Currently there is no good alternative to LIBOR, although the Overnight Index Swap (OIS) and “LIBOR floors” are trying to replace it with limited success. So, the marketplace is searching for an alternative with many banks attempting to devise their own measures to varying degrees of success. The British Bankers Association has noticed this, which is why they are trying to rework this measure.
Source: Bianco Research